Question

What is the difference between the reported gain (loss) on debt repurchase and the economic gain (loss) on the repurchase? How should such gains / losses be analyzed? Why are current values not reflected on a company's balance sheet?

Answer 1

Reported or accounting gain/loss is the derived from selling price and buying price. Say, If the selling price is $100 and buying price is $80. So, reported gain/loss=(100-80)=$20

On the other hand economic gain also includes the opportunity cost. So, economic gain is always less than reporting gain/loss.

If the money has been invested for debt repurchase i.e. to save interest cost on the debt the, it should seen whether the cash used to repurchase the debt could have generate more income than interest cost. If the interest cost is more than money could have generated in the process, the debt repurchase worth it and vice versa.

Balance Sheet reflects the cumulative values since companies inception but Income Statement shows the current values.